The role of money and the financial sector in energy-economy models used for assessing climate and energy policy

This article outlines a critical gap in the assessment methodology used to estimate the macroeconomic costs and benefits of climate and energy policy, which could lead to misleading information being used for policy-making. We show that the Computable General Equilibrium (CGE) models that are typically used for assessing climate policy use assumptions about the financial system that sit at odds with the observed reality. These assumptions lead to ‘crowding out’ of capital and, because of the way the models are constructed, negative economic impacts (in terms of gross domestic product (GDP) and welfare) from climate policy in virtually all cases.

In contrast, macro-econometric models, which follow non-equilibrium economic theory and adopt a more empirical approach, apply a treatment of the financial system that is more consistent with reality. Although these models also have major limitations, they show that green investment need not crowd out investment in other parts of the economy – and may therefore offer an economic stimulus. Our conclusion is that improvements in both modelling approaches should be sought with some urgency – both to provide a better assessment of potential climate and energy policy and to improve understanding of the dynamics of the global financial system more generally.

POLICY RELEVANCE

This article discusses the treatment of the financial system in the macroeconomic models that are used in assessments of climate and energy policy. It shows major limitations in approach that could result in misleading information being provided to policy-makers.     

Convergence of per capita carbon dioxide emissions: implications and meta-analysis

There is a rich empirical literature testing whether per capita carbon dioxide emissions tend to converge over time and across countries. This article provides a meta-analysis of the results from this research, and discusses how carbon emissions convergence may be understood in, for instance, the presence of international knowledge spillovers and policy convergence. The results display evidence of either divergence or persistent gaps at the global level, but convergence of per capita carbon dioxide emissions between richer industrialized countries. However, the results appear sensitive to the choice of data sample and choice of convergence concept, e.g. stochastic convergence versus β-convergence. Moreover, peer-reviewed studies have a higher likelihood of reporting convergence in carbon dioxide emissions compared to non-refereed work.

POLICY RELEVANCE

The empirical basis for an egalitarian rule of equal emissions per capita in the design of global climate agreements is not solid; this supports the need to move beyond single allocation rules, and increase knowledge about the impacts of combined scenarios. However, even in the context of the 2015 Paris Agreement with its emphasis on voluntary contributions and ‘national circumstances’, different equity-based principles could serve as useful points of reference for how the remaining carbon budget should be allocated.     

Adaptation to climate change in Bangladesh

Climate change is expected to disproportionately affect agriculture in Bangladesh; however, there is limited information on smallholder farmers’ overall vulnerability and adaptation needs. This article estimates the impact of climatic shocks on the household agricultural income and, subsequently, on farmers’ adaptation strategies. Relying on data from a survey conducted in several communities in Bangladesh in 2011 and based on an IV probit approach, the results show that a 1 percentage point (pp) climate-induced decline in agricultural income pushes Bangladeshi households to adapt by almost 3 pp. Moreover, Bangladeshi farmers undertake a variety of adaptation options. However, several barriers to adaptation were identified, noticeably access to electricity and wealth. In this respect, policies can be implemented in order to assist the Bangladeshi farming community to adapt to climate change.

Policy relevance

This study contributes to the literature of adaptation to climate change by providing evidence of existing risk-coping strategies and by showing how a household’s ability to adapt to weather-related risk can be limited. This study helps to inform the design of policy in the context of increasing climatic stress on the smallholder farmers in Bangladesh.     

Assessing the ambition of post-2020 climate targets: a comprehensive framework

One of the most fundamental questions surrounding the new Paris Agreement is whether countries’ proposals to reduce GHG emissions after 2020 are equally ambitious, considering differences in circumstances between countries. We review a variety of approaches to assess the ambition of the GHG emission reduction proposals by countries. The approaches are applied illustratively to the mitigation part of the post-2020 climate proposals (nationally determined contributions, or NDCs) by China, the EU, and the US. The analysis reveals several clear trends, even though the results differ per individual assessment approach. We recommend that such a comprehensive ambition assessment framework, employing a large variety of approaches, is used in the future to capture a wide spectrum of perspectives on ambition.

POLICY RELEVANCE

Assessing the ambition of the national climate proposals is particularly important as the Paris Agreement asks for regular reviews of national contributions, keeping in mind that countries raise their ambition over time. Such an assessment will be an important part of the regular global stocktake that will take place every five years, starting with a ‘light’ version in 2018. However, comprehensive methods to assess the proposals are lacking. This article provides such a comprehensive assessment framework.     

Indigenous community benefits from a de-centralized approach to REDD+ in Brazil

Successful efforts of indigenous groups to reduce emissions from deforestation and forest degradation in developing countries (REDD+) will likely vary with how the initiatives are designed and implemented. Whether REDD+ initiatives are carried out by national governments or decentralized to sub-national or project-level institutions with a nested approach could be of great consequence. I describe the Suruí Forest Carbon Project in Amazonian Brazil, one of the first REDD+ pilot projects implemented with indigenous people in the world. I emphasize (1) how enfranchisement of community members in the policy-planning process, fund management, and carbon baseline establishment increased project reliability and equity, and (2) how the project's quality would have likely been diminished if implemented under a centralized REDD+ scheme.

Policy relevance

This article explores a decentralized REDD+ intervention established in an indigenous land in Brazil. It expands the theoretical discussions on REDD+ governance and highlights how centralized REDD+ programmes are likely to be less effective than project-level interventions assisted by NGOs in terms of social benefits and community engagement. Additionally, the case study described can serve as reference for the design of critical social and technical components of REDD+.     

Could Cohesion Policy push EU climate efforts?

The main purpose of this article is to evaluate the extent to which the Cohesion Policy of the EU contributes to its climate change mitigation effort. While climate change mitigation and the EU Cohesion Policy have been both thoroughly studied theoretically, the novelty of the present article lies in an analysis of their mutual relationship. Also, a unique feature of this research is an analysis of the contribution of the Cohesion Policy to climate change mitigation over a period of 20 years, including a comparison of the three last programming periods (2000–2006, 2007–2013 and 2014–2020). The results of this research suggest that, while the beginning of the new millennium saw the Cohesion Policy neglecting the issue of climate change mitigation, the current programming period (2014–2020) placed it among its key priorities. This conclusion is supported by a comprehensive set of data on five selected indicators. This article also displays the results against the perspective of the overall climate change mitigation objectives of the EU.

POLICY RELEVANCE

The present article shows how a policy, which used to be considered rather distant from climate change, progressively adopted climate change mitigation as one of its principal objectives. As such, it provides a practical guidance on the integration of climate change mitigation in other policy areas, which may be applied not only in a supranational organisation but also on a national, regional or local level.     

Assessing the EU ETS with a bottom-up,multi-sector model

The European Emissions Trading System (EU ETS) is the central pillar of the EU response against climate change. This trading mechanism is considered, from the theoretical point of view, as the most cost-effective method to reduce GHG. However, previous studies show that the agents who participate in these markets may behave in a way that may lead to inefficient CO₂ prices, creating doubts about the static and dynamic efficiency of the system. This article analyses these possible anomalies by first trying to model the ETS in a more realistic way, addressing some of the limitations of previous models, and second, by comparing the results with real market transactions. For this, a bottom-up, multi-sector model has been built, which represents the EU ETS in an integrated, cross-sectoral way, paying particular attention to the interactions among the most emissions intensive industries. The results show the benefits of this modelling approach and how it better reflects real market conditions. Some preliminary conclusions regarding the behaviour of the agents in the ETS market are also presented.

POLICY RELEVANCE

Low allowance prices in the EU ETS have put into question the dynamic efficiency of the EU ETS system, prompting various ideas for structural reform. However, determining the right reform also requires estimating correctly how agents will respond to it. This article proposes a tool to realistically simulate the EU ETS under the assumption of rational agents, and compare it to real market outcomes, in order to understand better the behaviour of agents in this carbon market, and therefore how to design better policies.     

The tools of climate adaptation policy: analysing instruments and instrument selection

Governments have a key role to play in the process of climate adaptation, through the development and implementation of public policy. Governments have access to a diverse array of instruments that can be employed to adapt their operations and influence the behaviour of individuals, organizations, and other governments. However, the choice of policy instrument is political, because it affects the distribution of benefits and costs, and entrenches institutional procedures and resources that are difficult to redeploy. This article identifies four key governing resources that governments employ in the service of adaptation and analyses these resources using criteria drawn from the policy studies literature. For each category, specific policy instruments are described, and examples are provided to illustrate how they have been used in particular jurisdictions. The article also discusses instrument selection, focusing on trade-offs among the instrument attributes, processes for setting the stage for instrument choice, jurisdictional constraints on instrument selection, and ways to avoid negative vertical and horizontal policy interplay.

Policy relevance

Adaptation is a nascent field of public policy, and courses of action to reduce vulnerability and build adaptive capacity are in their infancy. This article contributes to policy development and analysis by identifying the range of policy instruments available to governments and analysing concrete ways in which they are employed to implement adaptation policy objectives. Taking stock of these adaptation tools and comparing their behavioural assumptions and attributes helps to illuminate potential policy options, and to evaluate their technical viability, political acceptability, and economic feasibility. Providing examples of how these instruments have been implemented successfully in other jurisdictions offers ideas and lessons for public officials.     

Power,coalitions and institutional change in South African climate policy

This paper examines power relations, coalitions and conflicts that drive and hinder institutional change in South African climate policy. The analysis finds that the most contested climate policies are those that create distributional conflicts where powerful, non-poor actors will potentially experience real losses to their fossil fuel-based operations. This finding opposes the assumption of competing objectives between emissions and poverty reduction. Yet, actors use discourse that relates to potentially competing objectives between emissions reductions, jobs, poverty reduction and economic welfare.

The analysis relates to the broader questions on how to address public policy problems that affect the two objectives of mitigating climate change and simultaneously boosting socio-economic development. South Africa is a middle-income country that represents the challenge of accommodating simultaneous efforts for emissions and poverty reduction.

Institutional change has been constrained especially in the process towards establishing climate budgets and a carbon tax. The opposing coalitions have succeeded in delaying the implementation of these processes, as a result of unequal power relations. Institutional change in South African climate policy can be predominantly characterized as layering with elements of policy innovation. New policies build on existing regulations in all three cases of climate policy examined: the climate change response white paper, the carbon tax and the renewable energy programme. Unbalanced power relations between coalitions of support in government and civil society and opposition mainly from the affected industry result in very fragile institutional change.

Key policy insights

• The South African government has managed to drive institutional change in climate policy significantly over the past 7 years.

• Powerful coalitions of coal-related industries and their lobbies have constrained institutional change and managed to delay the implementation of carbon pricing measures.

• A successfully managed renewable energy programme has started to transform a coal- and nuclear-powered electricity sector towards integrating sustainable energy technologies. The programme is vulnerable to intergovernmental opposition and requires management at the highest political levels.

• Potential conflict with poverty reduction measures is not a major concern that actively hinders institutional change towards climate objectives. Predominantly non-poor actors frequently use poverty-related discourse to elevate their interests to issues of public concern.

     

Green growth and climate change: conceptual and empirical considerations

The feasibility of green growth is studied in the context of climate change. As carbon emissions are easier to quantify than many other types of environmental pressure, it will be possible to reach a more definite conclusion about the likelihood of green growth than has been possible in the long-standing historical debate on growth versus the environment. We calculate the rate of decoupling between gross domestic product (GDP) and GHG emissions needed to achieve internationally agreed climate targets. Next, eight arguments are considered that together suggest that fast decoupling will be very difficult. Subsequently, we examine the main lines of research used by proponents of green growth to support their viewpoint, including theoretical arguments, exercises with integrated assessment models, and studies of the environmental Kuznets curve hypothesis. It will be concluded that decoupling as a main or single strategy to combine economic and environmental aims should be judged as taking a very large risk with our common future. To minimize this risk we need to seriously consider reducing our dependence on growth. This requires a fundamental change of focus in both economic research and policy.

Policy relevance

Currently, green growth is the only strategy of mainstream economists and policy makers to address climate change. This article demonstrates that such an exclusive focus is very risky due to the scale of the challenge and the existence of various barriers to the fast decoupling of GHG emissions from economic output. It seems that the only option to combine environmental and economic objectives is reducing the dependence of our economies on growth. Finding strategies in line with this requires a fundamental change of focus in both economic research and policy.     

Do international factors influence the passage of climate change legislation?

The number of climate change laws in major economies has grown from less than 40 in 1997 to almost 500 at the end of 2013. The passage of these laws is influenced by both domestic and international factors. This article reviews the main international factors, drawing on a powerful new dataset of climate legislation in 66 national jurisdictions. We find that the propensity to legislate on climate change is heavily influenced by the passage of similar laws elsewhere, suggesting a strong and so far under-appreciated role for international policy diffusion. International treaties such as the Kyoto Protocol work in two ways. The impact of the Kyoto Protocol itself is limited to countries with formal obligations under the treaty. In addition, the prestige of hosting an international climate summit is associated with a subsequent boost in legislation. Legislators seem to respond to the expectations of climate leadership that these events bestow on their host.

Policy relevance

A global solution to climate change will ultimately have to be anchored in domestic legislation, which creates the legal basis for countries to take action. Countries are passing climate legislation in a growing number. This article asks to what extent they are motivated to do so by international factors, such as existing treaty obligations. We find that the Kyoto Protocol has been a less important factor in explaining climate legislation outside Annex I than the passage of similar laws elsewhere. This suggests that international policy diffusion plays an important and so far under-appreciated role in global climate policy, complementing formal treaty obligations.     

Improving technology transfer through national systems of innovation: climate relevant innovation-system builders (CRIBs)

The Technology Executive Committee (TEC) of the United Nations Framework Convention on Climate Change (UNFCCC) recently convened a workshop seeking to understand how strengthening national systems of innovation (NSIs) might help to foster the transfer of climate technologies to developing countries. This article reviews insights from the literatures on Innovation Studies and Socio-Technical Transitions to demonstrate why this focus on fostering innovation systems has potential to be more transformative as an international policy mechanism for climate technology transfer than anything the UNFCCC has considered to date. Based on insights from empirical research, the article also articulates how the existing architecture of the UNFCCC Technology Mechanism could be usefully extended by supporting the establishment of CRIBs (climate relevant innovation-system builders) in developing countries – key institutions focused on nurturing the climate-relevant innovation systems and building technological capabilities that form the bedrock of transformative, climate-compatible technological change and development.

Policy relevance

This article makes a direct contribution to current work by the TEC of the UNFCCC on enhancing enabling environments for and addressing barriers to technology development and transfer (specifically, it will contribute to Activity 4.3 of the TEC's 2014–15 rolling workplan ‘Further work on enablers and barriers, taking into account the outcomes of the workshop on NSIs’). The article articulates both the conceptual basis that justifies a focus on NSIs in relation to climate technology transfer and makes concrete recommendations as to how this can be implemented under the Convention as a Party-driven extension to the existing architecture of the Technology Mechanism.     

Temperature Extremes from Canadian Regional Climate Model (CRCM) Climate Change Projections

Future climate projections of extreme events can help forewarn society of high-impact events and allow the development of better adaptation strategies. In this study a non-stationary model for Generalized Extreme Value (GEV) distributions is used to analyze the trend in extreme temperatures in the context of a changing climate and compare it with the trend in average temperatures.

The analysis is performed using the climate projections of the Canadian Regional Climate Model (CRCM), under an IPCC SRES A2 greenhouse gas emissions scenario, over North America. Annual extremes in daily minimum and maximum temperatures are analyzed. Significant positive trends for the location parameter of the GEV distribution are found, indicating an expected increase in extreme temperature values. The scale parameter of the GEV distribution, on the other hand, reveals a decrease in the variability of temperature extremes in some continental regions. Trends in the annual minimum and maximum temperatures are compared with trends in average winter and summer temperatures, respectively. In some regions, extreme temperatures exhibit a significantly larger increase than the seasonal average temperatures.

The CRCM projections are compared with those of its driving model and framed in the context of the Coupled Model Intercomparison Project, phase 3 (CMIP3) Global Climate Model projections. This enables us to establish the CRCM position within the CMIP3 climate projection uncertainty range. The CRCM is validated against the HadEX2 dataset in order to assess the CRCM representation of temperature extremes in the present climate. The validation is also framed in the context of CMIP3 validation results. The CRCM cold extremes validate better and are closer to the driving model and CMIP3 projections than the hot extremes.     

Compliance of the Parties to the Kyoto Protocol in the first commitment period

This article provides an ex post analysis of the compliance of the Parties to the Kyoto Protocol during the first commitment period (2008–2012) based on the final data for national GHG emissions and exchanges in carbon units that became available at the end of 2015. On the domestic level, among the 36 countries that fully participated in the Kyoto Protocol, only nine countries emitted higher levels of GHGs than committed and therefore had to resort to flexibility mechanisms. On the international level – i.e. after the use of flexibility mechanisms – all Annex B Parties are in compliance. Countries implemented different compliance strategies: purchasing carbon units abroad, stimulating the domestic use of carbon credits by the private sector and incentivizing domestic emission reductions through climate policies.

Overall, the countries party to the Protocol surpassed their aggregate commitment by an average 2.4 GtCO₂e yr^–1. Of the possible explanations for this overachievement, ‘hot-air’ was estimated at 2.2 GtCO₂e yr^–1, while accounting rules for land use, land-use change and forestry (LULUCF) further removed 0.4 GtCO₂e yr^–1 from the net result excluding LULUCF. The hypothetical participation of the US and Canada would have reduced this overachievement by a net 1 GtCO₂e yr^–1. None of these factors – some of which may be deemed illegitimate – would therefore on its own have led to global non-compliance, even without use of the 0.3 GtCO₂e of annual emissions reductions generated by the Clean Development Mechanism. The impact of domestic policies and ‘carbon leakage’ – neither of which is quantitatively assessed here – should not be neglected either.

Policy relevance

Given the ongoing evolution of the international climate regime and the adoption of the Paris Agreement in December 2015, we believe that there is a need to evaluate the results of the first commitment period of the Kyoto Protocol. To our knowledge there has been no overarching quantitative ex post assessment of the Kyoto Protocol based on the final emissions data for 2008–2012, which became available in late 2015. This article attempts to fill this gap, focusing on the domestic and international compliance of the Parties to the Kyoto Protocol in the first commitment period.     

Effective and geographically balanced? An output-based assessment of non-state climate actions

At COP21 in Paris, governments reiterated the importance of ‘non-Party’ contributions, placing big bets that the efforts of cities, regions, investors, companies, and other social groups will help keep average global warming limited to well under 2°C. However, there is little systematic knowledge concerning the performance of non-state and subnational efforts. We established a database of 52 climate actions launched at the 2014 UN Climate Summit in New York to assess output performance – that is, the production of relevant outputs – to understand whether they are likely to deliver social and environmental impacts. Moreover, we assess to which extent climate actions are implemented across developed and developing countries. We find that climate actions are starting to deliver, and output performance after one year is higher than one might expect from previous experiences with similar actions. However, differences exist between action areas: resilience actions have yet to produce specific outputs, whereas energy and industry actions perform above average. Furthermore, imbalances between developing and developed countries persist. While many actions target low-income and lower-middle-income economies, the implementation gap in these countries remains greater. More efforts are necessary to mobilize and implement actions that benefit the world’s most vulnerable people.

Policy relevance

Climate actions by non-state and subnational actors are an important complement to the multilateral climate regime and the associated contributions made by national governments. Although such actions hold much potential, we still know very little about how they could deliver in practice. This article addresses this knowledge gap, by showing how 52 climate actions announced at the UN Climate Summit in 2014 have performed thus far. Based on our analysis, we argue that the post-Paris action agenda for non-state and subnational climate action should (1) find more effective ways to incentivize private sector actors to engage in transnational climate governance through actions that seek to reduce greenhouse gas emissions and promote climate resilience in a tangible manner; (2) identify factors underlying effectiveness, to take appropriate measures to support underperforming climate actions; and (3) address the large implementation gap of climate actions in developing countries.     

Ex-post cap adjustment for China’s ETS: an applicable indexation rule,simulating the Hubei ETS,and implications for a national scheme

China plans to launch its nationwide Emissions Trading Scheme (ETS) in 2017. Uncertainty in China’s future economic growth rate and its effect on underlying emissions may need to be addressed to ensure stability of the scheme. This article investigates an ex-post cap adjustment mechanism for China’s ETS. An applicable rule for indexation of emissions targets to gross domestic product (GDP) adjustment is presented. Such an ex-post optimal emissions intensity target is estimated in an empirical simulation of the Hubei ETS, a large pilot scheme in a fast-growing Chinese province. And its implications for China’s planned national ETS have been discussed. The article finds that by correcting the emissions cap for the difference between expected and realized GDP, the ex-post adjustment can minimize the abatement costs. It can also limit the influence of uncertainties, as it minimizes the standard deviation of realized abatement, abatement cost, and allowance price for a given expected emissions reduction. In addition, with a limited number of parameters requiring estimation, the ex-post cap adjustment mechanism is feasible. It is consistent with the anticipated design of China’s planned national ETS and could be used alongside other design options such as price corridors.

POLICY RELEVANCE

It will be important for the stability of China’s planned national ETS to address uncertainty about future GDP growth which can significantly affect underlying emissions growth. This paper proposes a specific solution, namely an ex-post cap adjustment mechanism for the ETS cap. This method provides flexibility with transparent rules, would be consistent with China’s overall ETS policy design, and could be implemented in practice as the required parameters can be readily estimated.     

Defining deep decarbonization pathways for Switzerland: an economic evaluation

This article simulates deep decarbonization pathways for a small open economy that lacks the usual avenues for large CO₂ reductions – heavy industry and power generation. A computable general equilibrium model is used to assess the energy and economic impacts of the transition to only one ton of CO₂ emissions per capita in 2050. This represents a 76% reduction with respect to 1990 levels, while the population is expected to be 46% larger and GPD to increase by 90%. The article discusses several options and scenarios that are compatible with this emissions target and compares them with a reference scenario that extrapolates already-decided climate and energy policy instruments. We show that the ambitious target is attainable at moderate welfare costs, even if it needs very high carbon prices, and that these costs are lower when either CO₂ can be captured and sequestered or electricity consumption can be taxed sufficiently to stabilize it.

Policy relevance

In the context of COP 21, all countries must propose intended contributions that involve deep decarbonization of their economy over the next decades. This article defines and analyses such pathways for Switzerland, taking into consideration the existing energy demand and supply and also already-defined climate policies. It draws several scenarios that are compatible with a target of 1 ton of CO₂ emissions per capita in 2050. This objective is very challenging, especially with the nuclear phase out decided after the disaster in Fukushima and the political decision to balance electricity trade. Nevertheless, it is possible to design several feasible pathways that are based on different options. The economic cost is significant but affordable for the Swiss economy. The insights are relevant not only for Switzerland, but also for other industrialized countries when defining their INDCs.     

Learning from CDM SD tool experience for Article 6.4 of the Paris Agreement

The Paris Agreement (PA) emphasizes the intrinsic relationship between climate change and sustainable development (SD) and welcomes the 2030 agenda for the global Sustainable Development Goals (SDGs). Yet, there is a lack of assessment approaches to ensure that climate and development goals are achieved in an integrated fashion and trade-offs avoided. Article 6.4 of the PA introduces a new Sustainable Mitigation Mechanism (SMM) with the dual aim to contribute to the mitigation of greenhouse gas emissions and foster SD. The Kyoto Protocol’s Clean Development Mechanism (CDM) has a similar objective and in 2014, the CDM SD tool was launched by the Executive Board of the CDM to highlight the SD benefits of CDM activities. This article analyses the usefulness of the CDM SD tool for stakeholders and compares the SD tool’s SD reporting requirements against other flexible mechanisms and multilateral standards to provide recommendations for improvement. A key conclusion is that the Paris Agreement’s SMM has a stronger political mandate than the CDM to measure that SD impacts are ‘real, measurable and long-term’. Recommendations for an improved CDM SD tool are a relevant starting point to develop rules, modalities, and procedures for SD assessment in Article 6.4 as well as for other cooperative mitigation approaches.

POLICY RELEVANCE

Research findings are relevant for developing the rulebook of modalities and procedures for Article 6.4 of the Paris Agreement, which introduces a new mechanism for mitigation of greenhouse gas emissions and sustainable development. Lessons learnt from the CDM SD tool and recommendations for enhanced SD assessment are discussed in context of Article 6 cooperative approaches, and make a timely contribution to inform negotiations on the rulebook agreed by the Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement.     

The Korean emissions trading scheme: business perspectives on the early years of operations

Korea’s domestic emissions trading scheme commenced in January 2015. It targeted mainly industrial and power sectors, and compelled companies to transform how they manage energy efficiency and mitigate GHGs. This study sets out to explore how Korean companies evaluated their allocation position and engaged in emissions trading in the first compliance period, and to identify their views on trading barriers and policy expectations at the start of emissions trading. Questionnaire surveys and on-site interviews targeting Korean companies under the Korean emissions trading scheme were conducted at the start of operations (February to March 2015) and after the first compliance year (May 2016), respectively. Actual operation results are observed and compared with the survey findings. This study extrapolates implications for policy and presents suggestions for the government and the target companies in terms of how to improve the current emissions trading scheme in order to further stimulate emissions trading.

POLICY RELEVANCE

This study attempts to bridge the gap between companies and government policy in operating the domestic emission trading scheme in Korea. Empirical results, based on analysis of company-level data, reveal how businesses perceive K-ETS and how this relates to the operating results, which saw only limited trading of surplus emissions taking place in the early phase. Key barriers to active trading identified in the study include supply–demand imbalance, policy uncertainty and lack of preparedness of companies over carbon pricing. These barriers could be addressed by improved transparency of allowance allocation methods, possibly restricting carry-over of surplus allowances, ending policy uncertainty and providing more information to companies that can support companies’ policy understanding of the carbon pricing based on the market mechanism. Targeted companies should proactively participate in emissions trading in the early phase, in order to learn from it and prepare for the future introduction of auctioning.